|
The history of economic thought was the philosophy that dealt with
different thinkers and theories in the subject that later became political
economy and economics, from the ancient world to the present day in the 21st
Century. This field encompasses many disparate schools of economic thought.
Ancient Greek writers such as the philosopher Aristotle examined ideas about
the art of wealth acquisition, and questioned whether property is best left in
private or public hands. In the Middle Ages, scholasticists such as Thomas
Aquinas argued that it was a moral obligation of businesses to sell goods at a
just price. In the Western world, economics was not a separate discipline, but
part of philosophy until the 18th–19th century Industrial Revolution and
the 19th century Great Divergence, which accelerated economic growth.[1]
Ancient Greece:
Hesiod active 750 to 650 BC, a Boeotian who wrote the earliest known work
concerning the basic origins of economic thought, contemporary with Homer.
China:
Lao (also known as Tao Zhu Gong) (born 517 BC),[2] an adviser to King Goujian
of Yue, wrote on economic issues and developed a set of "golden"
business rules.[3]
India:
Chanakya (born 350 BC) of the Mauryan Empire, authored the Arthashastra along
with several Indian sages, a treatise on statecraft, economic policy and
military strategy.[4] The Arthashastra posits the theory that there are four
necessary fields of knowledge: the Vedas, the Anvikshaki (philosophy of
Samkhya, Yoga and Lokayata), the science of government, and the science of
economics (Varta of agriculture, cattle, and trade). It is from these four that
all other knowledge, wealth, and human prosperity is derived.[5]
Greco-Roman world:
Plato and his pupil Aristotle had an enduring effect on Western philosophy.
Ancient Athens, an advanced city-state civilisation and progressive society,
developed an embryonic model of democracy.[6]
Xenophon's (c. 430–354 BC) Oeconomicus (c. 360 BC) is a dialogue
principally about household management and agriculture.
Plato's dialogue The Republic (c. 380–360 BC) describing an ideal
city-state run by philosopher-kings contained references to specialization of
labor and to production. According to Joseph Schumpeter, Plato was the first
known advocate of a credit theory of money that is, money as a unit of account
for debt.[7]
Aristotle's Politics (c. 350 BC) analyzed different forms of the state
(monarchy, aristocracy, constitutional government, tyranny, oligarchy, and
democracy) as a critique of Plato's model of a philosopher-kings. Of particular
interest for economists, Plato provided a blueprint of a society based on
common ownership of resources. Aristotle viewed this model as an oligarchical
anathema. Though Aristotle did certainly advocate holding many things in
common, he argued that not everything could be, simply because of the
"wickedness of human nature".[8] "It is clearly better that
property should be private", wrote Aristotle, "but the use of it
common; and the special business of the legislator is to create in men this
benevolent disposition." In Politics Book I, Aristotle discusses the
general nature of households and market exchanges. For him there is a certain
"art of acquisition" or "wealth-getting", but because
it[clarification needed] is the same many people are obsessed with its
accumulation, and "wealth-getting" for one's household is
"necessary and honorable", while exchange on the retail trade for
simple accumulation is "justly censured, for it is dishonorable".[9]
Writing of the people, Aristotle stated that they as a whole thought
acquisition of wealth (chrematistike) as being either the same as, or a
principle of oikonomia ("household management" –
oikonomos),[10][11] with oikos meaning "house" and with (themis
meaning "custom") nomos meaning "law".[12] Aristotle
himself highly disapproved of usury and cast scorn on making money through a
monopoly.[13] Aristotle discarded Plato's credit theory of money for metallism,
the theory that money derives its value from the purchasing power of the
commodity upon which it is based, and is only an "instrument", its
sole purpose being a medium of exchange, which means on its own "it is
worthless... not useful as a means to any of the necessities of life".[14]
Economic thought in the Middle Ages (500–1500 AD):
Thomas Aquinas (1225–1274) taught that high prices in response to high
demand is theft.
Main articles:
Thomas Aquinas, Scholasticism, Duns Scotus, Ibn Khaldun, Muqaddimah, and
Islamic economic jurisprudence
Thomas Aquinas :
Thomas Aquinas (1225–1274) was an Italian theologian and economic writer.
He taught in both Cologne and Paris, and was part of a group of Catholic
scholars known as the Schoolmen, who moved their enquiries beyond theology to
philosophical and scientific debates. In the treatise Summa Theologica Aquinas
dealt with the concept of a just price, which he considered necessary for the
reproduction of the social order. Similar in many ways to the modern concept of
long-run equilibrium, a just price was just sufficient to cover the costs of
production, including the maintenance of a worker and his family. Aquinas
argued it was immoral for sellers to raise their prices simply because buyers
had a pressing need for a product. Aquinas discusses a number of topics in the
format of questions and replies, substantial tracts dealing with Aristotle's
theory. Questions 77 and 78 concern economic issues, primarily what a just
price might be, and the fairness of a seller dispensing faulty goods. Aquinas
argued against any form of cheating and recommended always paying compensation
in lieu of good service[clarification needed]. Whilst human laws might not
impose sanctions for unfair dealing, divine law did, in his opinion.
Duns Scotus:
Duns Scotus (1265–1308) One of Aquinas' main critics[15] was Duns Scotus
(1265–1308), originally from Duns Scotland, who taught in Oxford, Cologne,
and Paris. In his work Sententiae (1295), he thought it possible to be more
precise than Aquinas in calculating a just price, emphasizing the costs of
labor and expenses, although he recognized that the latter might be inflated by
exaggeration because buyer and seller usually have different ideas of a just
price. If people did not benefit from a transaction, in Scotus' view, they
would not trade. Scotus said merchants perform a necessary and useful social
role by transporting goods and making them available to the public.[15]
Jean Buridan:
Jean Buridan (French: [by?id?~]; Latin Johannes Buridanus; c. 1300 – after
1358) was a French priest. Buridanus looked at money from two angles: its metal
value and its purchasing power, which he acknowledged can vary. He argued that
aggregated, not individual, demand and supply determine market prices. Hence,
for him a just price was what the society collectively and not just one
individual is willing to pay.
Ibn Khaldun:
Ibn Khaldun (1332–1406) Businesses owned by responsible and organized
merchants shall eventually surpass those owned by wealthy rulers.[16] Ibn
Khaldun on economic growth and the ideals of Platonism Until Joseph J.
Spengler's 1964 work "Economic Thought of Islam: Ibn Khaldun",[17]
Adam Smith (1723–1790) was considered the "Father of Economics".
Now there is a second candidate, Arab Muslim scholar Ibn Khaldun
(1332–1406) of Tunisia, although what influence Khaldun had in the West is
unclear. Arnold Toynbee called Ibn Khaldun a "genius" who
"appears to have been inspired by no predecessors and to have found no
kindred souls among his contemporaries...and yet, in the Prolegomena
(Muqaddimat) to his Universal History he has conceived and formulated a
philosophy of history which is undoubtedly the greatest work of its kind that
has ever yet been created by any mind in any time or place."[18] Ibn
Khaldoun expressed a theory of the lifecycle of civilizations, the
specialization of labor, and the value of money as a means of exchange rather
than as a store of inherent value. His ideas on taxes bore a striking
resemblance to supply-side economics' Laffer curve, which posits that beyond a
certain point higher taxes discourage production and actually cause revenues to
fall.[19]
Nicole Oresme:
Nicolas d'Oresme (1320–82) French philosopher and priest Nicolas d'Oresme
(1320–1382) wrote De origine, natura, jure et mutationibus monetarum,
about the origin, nature, law, and alterations of money. It is one of the
earliest manuscripts on the concept of money. His treatise argues how money or
currency belongs to the public, and that the government or sovereign of the
economy has no right to control the value of the currency just so that they can
profit from it.
Antonin of Florence:
Saint Antoninus of Florence (1389–1459), O.P., was an Italian Dominican
friar, who became Archbishop of Florence. Antoninus' writings address social
and economic development, and argued that the state has a duty to intervene in
mercantile affairs for the common good, and an obligation to help the poor and
needy. In his primary work, "summa theologica" he was mainly
concerned about price, justice and capital theory. Like Duns Scotus, he
distinguishes between the natural value of a good and its practical value. The
latter is determined by its suitability to satisfy needs (virtuositas), its
rarity (raritas) and its subjective value (complacibilitas). Due to this
subjective component there can not only be one just price, but a bandwidth of
more or less just prices.
Mercantilism and international trade (16th to 18th century):
Marquis de Mirabeau (1715–1789):
Main article: Mercantilism:
See also: International trade and School of Salamanca Key people: Victor de
Riqueti, marquis de Mirabeau; Jean Bodin; Nicolaus Copernicus; Edward
Misselden; Gerard Malynes; Thomas Mun; William Petty; Philipp von Hörnigk;
Charles Davenant; Josiah Child; Jean-Baptiste Colbert; Pierre Le Pesant, sieur
de Boisguilbert; Sir James Steuart; and Leonardus Lessius
Mercantilism dominated Europe from the 16th to the 18th century.[20] Despite
the localism of the Middle Ages, the waning of feudalism saw new national
economic frameworks begin to strengthen. After the 15th century voyages of
Christopher Columbus and other explorers opened up new opportunities for trade
with the New World and Asia, newly-powerful monarchies wanted a more powerful
military state to boost their status. Mercantilism was a political movement and
an economic theory that advocated the use of the state's military power to
ensure that local markets and supply sources were protected, spawning
protectionism.
Mercantile theorists held that international trade could not benefit all
countries at the same time. Money and precious metals were the only source of
riches in their view, and limited resources must be allocated between
countries, therefore tariffs should be used to encourage exports, which bring
money into the country, and discourage imports which send it abroad. In other
words, a positive balance of trade ought to be maintained through a surplus of
exports, often backed by military might. Despite the prevalence of the model,
the term mercantilism was not coined until 1763, by Victor de Riqueti, marquis
de Mirabeau (1715–1789), and popularized by Adam Smith in 1776, who
vigorously opposed it.
School of Salamanca:
Main articles: School of Salamanca and Tomás de Mercado:
In the 16th century the Jesuit School of Salamanca in Spain developed economic
theory to a high level, only to have their contributions forgotten until the
20th century.
Sir Thomas More (1478–1535)
Main article: Sir Thomas More:
In 1516 English humanist Sir Thomas More (1478–1535) published Utopia,
which describes an ideal society where land is owned in common and there is
universal education and religious tolerance, inspiring the English Poor Laws
(1587) and the communism-socialism movement.
Nicolaus Copernicus (1473–1543):
Main articles: Nicolaus Copernicus and Quantity theory of money
In 1517 astronomer Nicolaus Copernicus (1473–1543) published the first
known argument for the quantity theory of money. In 1519 he also published the
first known form of Gresham's Law: "Bad money drives out good".
Jean Bodin (1530–1596):
Main article: Jean Bodin:
In 1568 Jean Bodin (1530–1596) of France published Reply to Malestroit,
containing the first known analysis of inflation, which he claimed was caused
by importation of gold and silver from South America, backing the quantity
theory of money.
Barthélemy de Laffemas (1545–1612):
In 1598 French mercantilist economist Barthélemy de Laffemas
(1545–1612) published Les Trésors et richesses pour mettre l'Estat
en splendeur, which blasted those who frowned on French silks because the
industry created employment for the poor, the first known mention of
underconsumption theory, which was later refined by John Maynard Keynes.
Leonardus Lessius (1554–1623):
Main article: Leonardus Lessius:
In 1605 Flemish Jesuit theologian Leonardus Lessius (1554–1623) published
On Justice and Law, the deepest moral-theological study of economics since
Aquinas, whose just price approach he claimed was no longer workable. After
comparing money's growth via avarice to the propagation of hares, he made the
first statement of the price of insurance as being based on risk.
Edward Misselden and Gerard Malynes:
Main articles: Edward Misselden and Gerard Malynes:
In 1622 English merchants Edward Misselden and Gerard Malynes began a dispute
over free trade and the desirability of government regulation of companies,
with Malynes arguing against foreign exchange as under the control of bankers,
and Misselden arguing that international money exchange and fluctuations in the
exchange rate depend upon international trade and not bankers, and that the
state should regulate trade to insure export surpluses.
Thomas Mun:
Main article: Thomas Mun English economist:
Thomas Mun (1571–1641) describes early mercantilist policy in his book
England's Treasure by Foreign Trade, which was not published until 1664,
although it was widely circulated in manuscript form during his lifetime. A
member of the East India Company, he wrote about his experiences in A Discourse
of Trade from England unto the East Indies (1621).
Sir William Petty (1623–1687):
Main article: William Petty:
In 1662 English economist Sir William Petty (1623–1687) began publishing
short works applying the rational scientific tradition of Francis Bacon to
economics, requiring that it only use measurable phenomena and seek
quantitative precision, coining the term "political arithmetic",
introducing statistical mathematics, and becoming the first scientific
economist.
Philipp von Hörnigk
Main article: Philipp von Hörnigk :
Philipp von Hörnigk (1640–1712, sometimes spelt Hornick or Horneck)
was born in Frankfurt and became an Austrian civil servant writing in a time
when his country was constantly threatened by Ottoman invasion. In
Österreich Über Alles, Wann es Nur Will (1684, Austria Over All, If
She Only Will) he laid out one of the clearest statements of mercantile policy,
listing nine principal rules of national economy: "To inspect the
country's soil with the greatest care, and not to leave the agricultural
possibilities of a single corner or clod of earth unconsidered... All
commodities found in a country, which cannot be used in their natural state,
should be worked up within the country... Attention should be given to the
population, that it may be as large as the country can support... gold and
silver once in the country are under no circumstances to be taken out for any
purpose... The inhabitants should make every effort to get along with their
domestic products... [Foreign commodities] should be obtained not for gold or
silver, but in exchange for other domestic wares... and should be imported in
unfinished form, and worked up within the country... Opportunities should be
sought night and day for selling the country's superfluous goods to these
foreigners in manufactured form... No importation should be allowed under any
circumstances of which there is a sufficient supply of suitable quality at
home." Nationalism, self-sufficiency and national power were the basic
policies proposed.[21]
Jean-Baptiste Colbert (1619–1683):
Main articles: Jean-Baptiste Colbert and Pierre Le Pesant, sieur de
Boisguilbert:
In 1665–1683 Jean-Baptiste Colbert (1619–1683) was minister of
finance under King Louis XIV of France, and set up national guilds to regulate
major industries. Silk, linen, tapestry, furniture manufacture and wine were
examples of the crafts in which France specialized, all of which came to
require membership in a guild to operate in until the French Revolution.
According to Colbert, "It is simply and solely the abundance of money
within a state [which] makes the difference in its grandeur and power."
Pierre Le Pesant, sieur de Boisguilbert (1646–1714) :
In 1695 French economist Pierre Le Pesant, sieur de Boisguilbert
(1646–1714) wrote a plea to Louis XIV to end Colbert's mercantilist
program, containing the first notion of an economical market, becoming the
first economist to question mercantile economic policy and value the wealth of
a country by its production and exchange of goods instead its assets.
Charles Davenant:
Main article: Charles Davenant:
In 1696 British mercantilist Tory Member of parliament Charles Davenant
(1656–1714) published Essay on the East India Trade, displaying the first
understanding of consumer demand and perfect competition.
Sir James Steuart:
Main article: Sir James Steuart:
In 1767 Scottish mercantilist economist Sir James Steuart (1713–1780)
published An Inquiry into the Principles of Political Economy, the first book
in English with the term "political economy" in the title, and the
first complete economics treatise. Sir James Steuart (1713–1780) An
Inquiry into the Principles of Political Economy, 1767
Mughal Emperor Aurangzeb:
Main article: Aurangzeb:
Emperor Aurangzeb, ruler of the Mughal India, compiled the sharia based
Fatawa-e-Alamgiri along several Muslim scholars which include Islamic
economics,[22][23] whose policies eventually led to the period of
Proto-industrialization.[24][25][self-published source?][26] It lasted as South
Asia's principal regulating body until the beginning of the 18th century.[27]
Pre-Classical (17th and 18th century) :
The British Enlightenment See also: Age of Enlightenment, Scottish
enlightenment, Thomas Hobbes, and William Petty
In the 17th century Britain went through troubling times, enduring not only
political and religious division in the English Civil War, King Charles I's
execution, and the Cromwellian dictatorship, but also the Great Plague of
London and Great Fire of London. The restoration of the monarchy under Charles
II, who had Roman Catholic sympathies, led to turmoil and strife, and his
Catholic-leaning successor King James II was swiftly ousted. Invited in his
place were Protestant William of Orange and Mary, who assented to the Bill of
Rights 1689, ensuring that the Parliament was dominant in what became known as
the Glorious Revolution. The upheaval was accompanied by a number of major
scientific advances, including Robert Boyle's discovery of the gas pressure
constant (1660) and Sir Isaac Newton's publication of Philosophiae Naturalis
Principia Mathematica (1687), which described Newton's laws of motion and his
universal law of gravitation. All these factors spurred the advancement of
economic thought.
For instance, Richard Cantillon (1680–1734) consciously imitated Newton's
forces of inertia and gravity in the natural world with human reason and market
competition in the economic world.[28] In his Essay on the Nature of Commerce
in General, he argued rational self-interest in a system of freely-adjusting
markets would lead to order and mutually-compatible prices. Unlike the
mercantilist thinkers however, wealth was found not in trade but in human
labor. The first person to tie these ideas into a political framework was John
Locke.
John Locke:
Main article: John Locke
John Locke (1632–1704) combined philosophy, politics and economics into
one coherent framework. John Locke (1632–1704) was born near Bristol, and
educated in London and Oxford. He is considered one of the most significant
philosophers of his era mainly for his critique of Thomas Hobbes' defense of
absolutism in Leviathan (1651) and of his social contract theory. Locke
believed that people contracted into society, which was bound to protect their
property rights.[29] He defined property broadly to include people's lives and
liberties, as well as their wealth. When people combined their labor with their
surroundings, that created property rights. In his words from his Second
Treatise on Civil Government (1689): "God hath given the world to men in
common... Yet every man has a property in his own person. The labour of his
body and the work of his hands we may say are properly his. Whatsoever, then,
he removes out of the state that nature hath provided and left it in, he hath
mixed his labour with, and joined to it something that is his own, and thereby
makes it his property."[30] Locke argued that not only should the
government cease interference with people's property (or their "lives,
liberties and estates"), but also that it should positively work to ensure
their protection. His views on price and money were laid out in a letter to a
Member of Parliament in 1691 entitled Some Considerations on the Consequences
of the Lowering of Interest and the Raising of the Value of Money (1691),
arguing that the "price of any commodity rises or falls, by the proportion
of the number of buyers and sellers", a rule which "holds universally
in all things that are to be bought and sold."[31]
Dudley North:
Main article: Dudley North (economist) :
Dudley North (1641–1691) argued that the results of mercantile policy are
undesirable. Dudley North (1641–1691) was a wealthy merchant and landowner
who worked for Her Majesty's Treasury and opposed most mercantile policy. His
Discourses upon trade (1691), published anonymously, argued against assuming a
need for a favorable balance of trade. Trade, he argued, benefits both sides,
promotes specialization, division of labor and wealth for everyone. Regulation
of trade interferes with these benefits, he said.
David Hume (1711–76):
Main article: David Hume:
David Hume (1711–1776) agreed with North's philosophy and denounced
mercantilist assumptions. His contributions were set down in Political
Discourses (1752), and later consolidated in his Essays, Moral, Political,
Literary (1777). Adding to the argument that it was undesirable to strive for a
favourable balance of trade, Hume argued that it is, in any case, impossible.
Hume held that any surplus of exports would be paid for by imports of gold and
silver. This would increase the money supply, causing prices to rise. That in
turn would cause a decline in exports until the balance with imports is
restored.
Bernard Mandeville:
Main article: Bernard Mandeville:
Bernard Mandeville, (1670–1733), was an Anglo-Dutch philosopher, political
economist and satirist. His main thesis is that the actions of men cannot be
divided into lower and higher. The higher life of man is a mere fiction
introduced by philosophers and rulers to simplify government and the relations
of society. In fact, virtue (which he defined as "every performance by
which man, contrary to the impulse of nature, should endeavour the benefit of
others, or the conquest of his own passions, out of a rational ambition of
being good") is actually detrimental to the state in its commercial and
intellectual progress. This is because it is the vices (i.e., the
self-regarding actions of men) which alone, by means of inventions and the
circulation of capital (economics) in connection with luxurious living,
stimulate society into action and progress.
Francis Hutcheson (1694–1746):
Main article: Francis Hutcheson (philosopher):
Francis Hutcheson (1694–1746), the teacher of Adam Smith from 1737 to
1740[32] is considered the end of a long tradition of thought on economics as
"household or family management",[33] [34] [35] stemming from
Xenophon's work Oeconomicus.[36] [37]
The Physiocrats and the circular flow
Pierre Samuel du Pont de Nemours, a prominent Physiocrat, emigrated to the
United States, and his son founded DuPont, the world's second biggest chemicals
company.
Francois Quesnay (1694–1774):
Main article: Physiocracy:
See also: John Law (economist), Pierre le Pesant de Boisguilbert, and Victor de
Riqueti
Similarly disenchanted with regulation on trade inspired by mercantilism, a
Frenchman named Vincent de Gournay (1712–1759) is reputed to have asked
why it was so hard to laissez faire ("let it be"), laissez passer
("let it pass"), advocating free enterprise and free trade. He was
one of the early Physiocrats, a Greek word meaning "Government of
nature", who held that agriculture was the source of wealth. As historian
David B. Danbom wrote, the Physiocrats "damned cities for their
artificiality and praised more natural styles of living. They celebrated
farmers."[38] Over the end of the seventeenth and beginning of the
eighteenth century big advances in natural science and anatomy included
discovery of blood circulation through the human body. This concept was
mirrored in the physiocrats' economic theory, with the notion of a circular
flow of income throughout the economy.
François Quesnay (1694–1774) was the court physician to King Louis
XV of France. He believed that trade and industry were not sources of wealth,
and instead in his book Tableau économique (1758, Economic Table) argued
that agricultural surpluses, by flowing through the economy in the form of
rent, wages, and purchases were the real economic movers.[39] Firstly, said
Quesnay, regulation impedes the flow of income throughout all social classes
and therefore economic development. Secondly, taxes on the productive classes,
such as farmers, should be reduced in favour of rises for unproductive classes,
such as landowners, since their luxurious way of life distorts the income flow.
David Ricardo later showed that taxes on land are non-transferable to tenants
in his Law of Rent.
Anne Robert Jacques Turgot (1727–1781):
Jacques Turgot (1727–1781) was born in Paris to an old Norman family. His
best known work, Réflexions sur la formation et la distribution des
richesses (Reflections on the Formation and Distribution of Wealth) (1766)
developed Quesnay's theory that land is the only source of wealth. Turgot
viewed society in terms of three classes: the productive agricultural class,
the salaried artisan class (classe stipendice) and the landowning class (classe
disponible). He argued that only the net product of land should be taxed and
advocated the complete freedom of commerce and industry. In August 1774 Turgot
was appointed to be minister of finance, and in the space of two years he
introduced many anti-mercantile and anti-feudal measures supported by the king.
A statement of his guiding principles, given to the king were "no
bankruptcy, no tax increases, no borrowing." Turgot's ultimate wish was to
have a single tax on land and abolish all other indirect taxes, but measures he
introduced before that were met with overwhelming opposition from landed
interests. Two edicts in particular, one suppressing corvées (charges
from farmers to aristocrats) and another renouncing privileges given to guilds,
inflamed influential opinion. He was forced from office in 1776.
Classical (18th and 19th century):
Ferdinando Galiani and On Money:
In 1751, Neapolitan philosopher Ferdinando Galiani published a nearly
exhaustive treatise on money called Della Moneta (On Money), 25 years before
Adam Smith's The Wealth of Nations, and therefore is seen as possibly the first
truly modern economic analysis. In its five sections, Della Moneta covered all
modern aspects of monetary theory, including the value and origin of money, its
regulation, and inflation. This text remained cited by various economists for
centuries, as wide-ranging a list as Karl Marx and Austrian economist Joseph
Schumpeter.
Adam Smith and The Wealth of Nations:
Main articles: The Wealth of Nations, Adam Smith, Pitt the Younger, and Edmund
Burke See also: Anders Chydenius Adam Smith (1723–1790), father of modern
political economy.
Adam Smith (1723–1790) is popularly seen as the father of modern political
economy. His 1776 publication An Inquiry Into the Nature and Causes of the
Wealth of Nations happened to coincide not only with the American Revolution,
shortly before the Europe-wide upheavals of the French Revolution, but also the
dawn of a new industrial revolution that allowed more wealth to be created on a
larger scale than ever before. Smith was a Scottish moral philosopher, whose
first book was The Theory of Moral Sentiments (1759). He argued in it that
people's ethical systems develop through personal relations with other
individuals, that right and wrong are sensed through others' reactions to one's
behaviour. This gained Smith more popularity than his next work, The Wealth of
Nations, which the general public initially ignored.[40] Yet Smith's political
economic magnum opus was successful in circles that mattered. Adam Smith's
Invisible Hand "It is not from the benevolence of the butcher, the brewer
or the baker, that we expect our dinner, but from their regard to their own
self-interest. We address ourselves, not to their humanity but to their
self-love, and never talk to them of our own necessities but of their
advantages."[41]
Adam Smith's famous statement on self-interest:
Main article: Invisible hand:
Smith argued for a "system of natural liberty"[42] where individual
effort was the producer of social good. Smith believed even the selfish within
society were kept under restraint and worked for the good of all when acting in
a competitive market. Prices are often unrepresentative of the true value of
goods and services. Following John Locke, Smith thought true value of things
derived from the amount of labour invested in them. Every man is rich or poor
according to the degree in which he can afford to enjoy the necessaries,
conveniencies, and amusements of human life. But after the division of labour
has once thoroughly taken place, it is but a very small part of these with
which a man's own labour can supply him. The far greater part of them he must
derive from the labour of other people, and he must be rich or poor according
to the quantity of that labour which he can command, or which he can afford to
purchase. The value of any commodity, therefore, to the person who possesses
it, and who means not to use or consume it himself, but to exchange it for
other commodities, is equal to the quantity of labour which it enables him to
purchase or command. Labour, therefore, is the real measure of the exchangeable
value of all commodities. The real price of every thing, what every thing
really costs to the man who wants to acquire it, is the toil and trouble of
acquiring it. —?[43] When the butchers, the brewers and the bakers acted
under the restraint of an open market economy, their pursuit of self-interest,
thought Smith, paradoxically drives the process to correct real life prices to
their just values. His classic statement on competition goes as follows. When
the quantity of any commodity which is brought to market falls short of the
effectual demand, all those who are willing to pay... cannot be supplied with
the quantity which they want... Some of them will be willing to give more. A
competition will begin among them, and the market price will rise... When the
quantity brought to market exceeds the effectual demand, it cannot be all sold
to those who are willing to pay the whole value of the rent, wages and profit,
which must be paid to bring it thither... The market price will sink...[44]
Limitations:
Adam Smith's title page of The Wealth of Nations.
Smith's vision of a free market economy, based on secure property, capital
accumulation, widening markets and a division of labour contrasted with the
mercantilist tendency to attempt to "regulate all evil human
actions."[42] Smith believed there were precisely three legitimate
functions of government. The third function was... ...erecting and maintaining
certain public works and certain public institutions, which it can never be for
the interest of any individual or small number of individuals, to erect and
maintain... Every system which endeavours... to draw towards a particular
species of industry a greater share of the capital of the society than what
would naturally go to it... retards, instead of accelerating, the progress of
the society toward real wealth and greatness. In addition to the necessity of
public leadership in certain sectors Smith argued, secondly, that cartels were
undesirable because of their potential to limit production and quality of goods
and services.[45] Thirdly, Smith criticised government support of any kind of
monopoly which always charges the highest price "which can be squeezed out
of the buyers".[46] The existence of monopoly and the potential for
cartels, which would later form the core of competition law policy, could
distort the benefits of free markets to the advantage of businesses at the
expense of consumer sovereignty.
William Pitt the Younger (1759–1806):
William Pitt the Younger (1759–1806), Tory Prime Minister in
1783–1801 based his tax proposals on Smith's ideas, and advocated free
trade as a devout disciple of The Wealth of Nations.[47] Smith was appointed a
commissioner of customs and within twenty years Smith had a following of new
generation writers who were intent on building the science of political
economy.[40]
Edmund Burke (1729–1797):
Adam Smith expressed an affinity to the opinions of Irish MP Edmund Burke
(1729–1797), known widely as a political philosopher: "Burke is the
only man I ever knew who thinks on economic subjects exactly as I do without
any previous communication having passed between us.[48] Burke was an
established political economist himself, known for his book Thoughts and
Details on Scarcity. He was widely critical of liberal politics, and condemned
the French Revolution which began in 1789. In Reflections on the Revolution in
France (1790) he wrote that the "age of chivalry is dead, that of
sophisters, economists and calculators has succeeded, and the glory of Europe
is extinguished forever." Smith's contemporary influences included
François Quesnay and Jacques Turgot whom he met on a visit to Paris, and
David Hume, his Scottish compatriot. The times produced a common need among
thinkers to explain social upheavals of the Industrial revolution taking place,
and in the seeming chaos without the feudal and monarchical structures of
Europe, show there was order still.
Jeremy Bentham (1748–1832) believed in "the greatest good for the
greatest number".
Main article: Jeremy Bentham
Jeremy Bentham (1748–1832) was perhaps the most radical thinker of his
time, and developed the concept of utilitarianism. Bentham was an atheist, a
prison reformer, animal rights activist, believer in universal suffrage,
freedom of speech, free trade and health insurance at a time when few dared to
argue for any of these ideas. He was schooled rigorously from an early age,
finishing university and being called to the bar at 18. His first book, A
Fragment on Government (1776), published anonymously, was a trenchant critique
of William Blackstone's Commentaries on the Laws of England. This gained wide
success until it was found that the young Bentham, and not a revered Professor
had penned it. In An Introduction to the Principles of Morals and Legislation
(1789) Bentham set out his theory of utility.[49][50]
Jean-Baptiste Say
Say's Law, by Jean-Baptiste Say (1767–1832), which states that supply
always equals demand, was rarely challenged until the 20th century.
Main article: Jean-Baptiste Say
Jean-Baptiste Say (1767–1832) was a Frenchman born in Lyon who helped
popularize Adam Smith's work in France.[51] His book A Treatise on Political
Economy (1803) contained a brief passage, which later became orthodoxy in
political economics until the Great Depression, now known as Say's Law of
markets. Say argued that there could never be a general deficiency of demand or
a general glut of commodities in the whole economy. People produce things, to
fulfill their own wants rather than those of others, therefore production is
not a question of supply but an indication of producers demanding goods. Say
agreed that a part of income is saved by households, but in the long term,
savings are invested. Investment and consumption are the two elements of
demand, so that production is demand, therefore it is impossible for production
to outrun demand, or for there to be a "general glut" of supply. Say
also argued that money was neutral, because its sole role is to facilitate
exchanges, therefore, people demand money only to buy commodities; "money
is a veil".[52]
David Ricardo:
David Ricardo (1772–1823) is renowned for his law of comparative
advantage.
Main article: David Ricardo
David Ricardo (1772–1823) was born in London. By the age of 26, he had
become a wealthy stock market trader, and bought himself a constituency seat in
Ireland to gain a platform in the British parliament's House of Commons.[53]
Ricardo's best known work is On the Principles of Political Economy and
Taxation (1817), which contains his critique of barriers to international trade
and a description of the manner in which income is distributed in the
population. Ricardo made a distinction between workers, who received a wage
fixed to a level at which they could survive, the landowners, who earn a rent,
and capitalists, who own capital and receive a profit, a residual part of the
income.[54] If population grows, it becomes necessary to cultivate additional
land, whose fertility is lower than that of already cultivated fields, because
of the law of decreasing productivity. Therefore, the cost of the production of
the wheat increases, as well as the price of the wheat: The rents increase
also, the wages, indexed to inflation (because they must allow workers to
survive) as well. Profits decrease, until the capitalists can no longer invest.
The economy, Ricardo concluded, is bound to tend towards a steady state.[52]
Jean Charles Léonard de Sismondi :
Jean Charles Léonard de Sismondi(1773–1842) The earliest author of
systemic Crisis theory.
John Stuart Mill :
John Stuart Mill (1806–1873), weaned on the philosophy of Jeremy Bentham,
wrote the most authoritative economics text of his time.
Main articles: Principles of Political Economy and John Stuart Mill:
John Stuart Mill (1806–1873) was the dominant figure of political economic
thought of his time, as well as a Member of parliament for the seat of
Westminster, and a leading political philosopher. Mill was a child prodigy,
reading Ancient Greek from the age of 3, and being vigorously schooled by his
father James Mill.[55] Jeremy Bentham was a close mentor and family friend, and
Mill was heavily influenced by David Ricardo. Mill's textbook, first published
in 1848 and titled Principles of Political Economy was essentially a summary of
the economic thought of the mid-nineteenth century.[56] Principles of Political
Economy (1848) was used as the standard text by most universities well into the
beginning of the twentieth century. On the question of economic growth Mill
tried to find a middle ground between Adam Smith's view of ever-expanding
opportunities for trade and technological innovation and Thomas Malthus' view
of the inherent limits of population. In his fourth book Mill set out a number
of possible future outcomes, rather than predicting one in particular.[52]
Classical political economy:
Main article: Classical economics See also: Thomas Edward Cliffe Leslie, Walter
Bagehot, and Thorold Rogers
The classical economists were referred to as a group for the first time by Karl
Marx.[57] One unifying part of their theories was the labour theory of value,
contrasting to value deriving from a general equilibrium theory of supply and
demand. These economists had seen the first economic and social transformation
brought by the Industrial Revolution: rural depopulation, precariousness,
poverty, apparition of a working class. They wondered about population growth,
because demographic transition had begun in Great Britain at that time. They
also asked many fundamental questions, about the source of value, the causes of
economic growth and the role of money in the economy. They supported a
free-market economy, arguing it was a natural system based upon freedom and
property. However, these economists were divided and did not make up a unified
current of thought. A notable current within classical economics was
underconsumption theory, as advanced by the Birmingham School and Thomas Robert
Malthus in the early 19th century. These argued for government action to
mitigate unemployment and economic downturns, and were an intellectual
predecessor of what later became Keynesian economics in the 1930s. Another
notable school was Manchester capitalism, which advocated free trade, against
the previous policy of mercantilism.
Karl Marx and communism:
Main article: Marxian economics :
Karl Marx (1818–1883) published a critique of classical economics based on
his reinterpretation of the labor theory of value.
Key people: Karl Marx and Friedrich Engels
Marx wrote his magnum opus Das Kapital (1867) at the British Museum's library
in London. Karl Marx begins with the concept of commodities. Before capitalism,
says Marx, production was based on slavery – in ancient Rome for example
– then serfdom in the feudal societies of medieval Europe. The current
mode of labor exchange has produced an erratic and unstable situation allowing
the conditions for revolution. People buy and sell their labor as people buy
and sell goods and services. People themselves have become disposable
commodities, as Marx wrote in The Communist Manifesto. Marx uses the word
"commodity" in an extensive metaphysical discussion of the nature of
material wealth, how the objects of wealth are perceived and how they can be
used. A commodity contrasts to objects of the natural world. When people mix
their labor with an object it becomes a "commodity". In the natural
world there are trees, diamonds, iron ore and people. In the economic world
they become chairs, rings, factories and workers. However, says Marx,
commodities have a dual nature, a dual value. He distinguishes the use value of
a thing from its exchange value.[58] The use value of a commodity exists only
as that commodity is used or consumed. If commodities are considered absolutely
isolated from their useful qualities the common property is human labor in the
abstract. Marx attempted to support his theory by linking his ideas of
"surplus value" and "socially necessary labor time" with
the classical labor theory of value and theories of rent. Marx theorized that
people over-value commodities such as glimmering diamonds.[59] Marx applied the
use/exchange distinction to labor and claimed that employers pay their workers
less in "exchange value" than the workers produce in "use
value". The difference, in Marx's terminology, is "surplus
value".[60] Therefore, says Marx, capitalism is a system of exploitation.
Marx believed that a reserve army of the unemployed would grow and grow,
fueling a downward pressure on wages as desperate people accepted work for
less. But this would produce a deficit of demand as the people's power to
purchase products lagged. A glut of unsold products would result, production
would be cut back, and profits decline until capital accumulation halted in an
economic depression. When the glut cleared, the economy would again start to
boom before the next cyclical bust begins. With every boom and bust, with every
capitalist crisis, thought Marx, tension and conflict between the increasingly
polarized classes of capitalists and workers would heighten. Ultimately, led by
the Communist party, Marx envisaged a revolution and the creation of a
classless society.
Henry George and Georgism:
Main articles: Henry George, Georgism, geolibertarianism, land value tax,
ecological economics, commons, and economic rent
In 1879, Henry George published an explosively popular treatise on why poverty
accompanies progress and boom follows bust. Henry George (1839–1897) is
popularly recognized as the intellectual inspiration for the economic
philosophy now known as Georgism. George is said to be the last classical
economist. During his life, George was one of the three most famous Americans,
along with Henry Ford and Thomas Edison. George's first book, Progress and
Poverty, was one of the most widely printed books in English, selling between 3
and 6 million copies by the early 1900s. Progress and Poverty sparked a
worldwide reform movement and is sometimes marked as the beginning of the
Progressive Era. Georgism declined in the second half of the 20th Century as
the Marxist and Austrian and Keynesian neoclassical schools gained popularity.
However, there are still active Georgist organizations and land reform
movements around the world. George's ideas have been incorporated into the
philosophies of socialism, libertarianism, and ecological economics. Paul
Samuelson listed Henry George as one of only six "American saints" in
classical economics.[61]
The London School of Economics Beatrice Webb (1858–1943) Sidney Webb
(1859–1947) George Bernard Shaw (1856–1950) Sir Roy Allen
(1906–1983)
Main articles: London School of Economics, Sidney Webb, Beatrice Webb, George
Bernard Shaw, and R.G.D. Allen:
In 1895 the London School of Economics (LSE) was founded by Fabian Society
members Sidney Webb (1859–1947), Beatrice Webb (1858–1943), and
George Bernard Shaw (1856–1950), joining the University of London in 1900.
In the 1930s LSE member Sir Roy G.D. Allen (1906–1983) popularized the use
of mathematics in economics.
Neoclassical (19th and early 20th century):
Main articles: Neoclassical economics, Marginalism, and Mathematical economics
See also: Léon Walras, Alexander del Mar, John Bates Clark, Irving
Fisher, William Ashley (economic historian), and Enrico Barone
Neoclassical economics developed in the 1870s. There were three main
independent schools. The Cambridge School was founded with the 1871 publication
of Jevons' Theory of Political Economy, developing theories of partial
equilibrium and focusing on market failures. Its main representatives were
Stanley Jevons, Alfred Marshall, and Arthur Pigou. The Austrian School of
Economics was made up of Austrian economists Carl Menger, Eugen von
Böhm-Bawerk, and Friedrich von Wieser, who developed the theory of capital
and tried to explain economic crises. It was founded with the 1871 publication
of Menger's Principles of Economics. The Lausanne School, led by Léon
Walras and Vilfredo Pareto, developed the theories of general equilibrium and
Pareto efficiency. It was founded with the 1874 publication of Walras' Elements
of Pure Economics.
Anglo-American neoclassical John Bates Clark (1847–1938)
American economist John Bates Clark (1847–1938) promoted the marginalist
revolution, publishing The Distribution of Wealth (1899), which proposed
Clark's Law of Capitalism: "Given competition and homogeneous factors of
production labor and capital, the repartition of the social product will be
according to the productivity of the last physical input of units of labor and
capital", also expressed as "What a social class gets is, under
natural law, what it contributes to the general output of industry." In
1947 the John Bates Clark Medal was established in his honor.[50]
William Stanley Jevons:
William Stanley Jevons (1835–1882) helped popularize marginal utility
theory. In 1871 Menger's English counterpart Stanley Jevons (1835–1882)
independently published Theory of Political Economy (1871), stating that at the
margin the satisfaction of goods and services decreases. An example of the
Theory of Diminishing Marginal Utility is that for every orange one eats, one
gets less pleasure until one stops eating oranges completely.[50]
Alfred Marshall :
Alfred Marshall (1842–1924) wrote the main alternative textbook to John
Stuart Mill of the day, Principles of Economics (1890) Alfred Marshall
(1842–1924) is also credited with an attempt to put economics on a more
mathematical footing. The first professor of economics at the University of
Cambridge, his 1890 work Principles of Economics[62] abandoned the term
"political economy" for his favorite "economics". He viewed
math as a way to simplify economic reasoning, although he had reservations as
revealed in a letter to his student Arthur Cecil Pigou:[50][63] "(1) Use
mathematics as shorthand language, rather than as an engine of inquiry. (2)
Keep to them till you have done. (3) Translate into English. (4) Then
illustrate by examples that are important in real life. (5) Burn the
mathematics. (6) If you can't succeed in 4, burn 3. This I do often."
New institutional schools Harold Demsetz (1930–2019):
Main articles: Harold Demsetz, Armen Alchian, and New institutional economics
In 1972 American economists Harold Demsetz (1930–2019) and Armen Alchian
(1914–2013) published Production, Information Costs and Economic
Organization, founding New Institutional Economics, an updating of the works of
Ronald Coase (1910–2013) with mainstream economics.[50]
Continental neoclassical Léon Walras:
Léon Walras (1834–1910) In 1874 again working independently, French
economist Léon Walras (1834–1910) generalized marginal theory
across the economy in Elements of Pure Economics: Small changes in people's
preferences, for instance shifting from beef to mushrooms, would lead to a
mushroom price rise, and beef price fall; this stimulates producers to shift
production, increasing mushrooming investment, which would increase market
supply and a new price equilibrium between the products, e.g. lowering the
price of mushrooms to a level between the two first levels. For many products
across the economy the same would happen if one assumes markets are
competitive, people choose on the basis of self-interest, and there's no cost
for shifting production.[50]
The Austrian school of economics Eugen von Böhm-Bawerk (1851–1914)
Friedrich von Wieser (1851–1926):
Main article: Austrian school:
While economics at the end of the nineteenth century and the beginning of the
twentieth was dominated increasingly by mathematical analysis, the followers of
Carl Menger (1840–1921) and his disciples Eugen von Böhm-Bawerk
(1851–1914) and Friedrich von Wieser (1851–1926) (coiner of the term
"marginal utility") followed a different route, advocating the use of
deductive logic instead. This group became known as the Austrian School of
Economics, reflecting the Austrian origin of many of the early adherents.
Thorstein Veblen in The Preconceptions of Economic Science (1900) contrasted
neoclassical marginalists in the tradition of Alfred Marshall with the
philosophies of the Austrian School.[64][65]
Carl Menger:
In 1871 Austrian School economist Carl Menger (1840–1921) restated the
basic principles of marginal utility in Grundsätze der
Volkswirtschaftslehre[66] (Principles of Economics): Consumers act rationally
by seeking to maximize satisfaction of all their preferences; people allocate
their spending so that the last unit of a commodity bought creates no more
satisfaction than a last unit bought of something else.[50]
Francis Ysidro Edgeworth :
Francis Ysidro Edgeworth (1845–1926) In 1881 Irish economist Francis
Ysidro Edgeworth (1845–1926) published Mathematical Psychics: An Essay on
the Application of Mathematics to the Moral Sciences, which introduced
indifference curves and the generalized utility function, along with
Edgeworth's Limit Theorem, extending the Bertrand Model to handle capacity
constraints, and proposing Edgeworth's Paradox for when there is no limit to
what the firms can sell.[50]
Friedrich Hayek (1899–1992):
In echoes of Smith's "system of natural liberty", Hayek argued that
the market is a "spontaneous order" and actively disparaged the
concept of "social justice".[67] Ludwig von Mises's outspoken
criticisms of socialism had a large influence on the economic thinking of
Austrian School economist Friedrich Hayek (1899–1992), who, while
initially sympathetic, became one of the leading academic critics of
collectivism in the 20th century.[68] Hayek believed that all forms of
collectivism (even those theoretically based on voluntary cooperation) could
only be maintained by a central authority. But he argued that centralizing
economic decision-making would lead not only to infringements of liberty but
also to depressed standards of living because centralized experts could not
gather and assess the knowledge required to allocate scarce resources
efficiently or productively. In his book, The Road to Serfdom (1944) and in
subsequent works, Hayek claimed that socialism required central economic
planning and that such planning in turn would lead towards totalitarianism.
Hayek attributed the birth of civilization to private property in his book The
Fatal Conceit (1988). According to him, price signals are the only means of
enabling each economic decision maker to communicate tacit knowledge or
dispersed knowledge to each other, to solve the economic calculation problem.
Along with his Socialist Swedish contemporary and opponent Gunnar Myrdal
(1898–1987), Hayek was awarded the Nobel Prize in Economics in 1974.[69]
Liberty and tradition go hand in hand in a planned and organized community of
well meaning actors
Alternative schools (19th century) Business cycle theory Sir William Herschel
(1738–1822) Clément Juglar (1819–1905) Nikolai Kondratiev
(1892–1938)
Main articles: Business cycles, William Herschel, Clement Juglar, and Nikolai
Kondratiev:
In the early 19th century German-born English astronomer Sir William Herschel
(1738–1822) noted a connection between 11-year sunspot cycles and wheat
prices. In 1860 French economist Clément Juglar (1819–1905) posited
business cycles seven to eleven years long. In 1925 the Soviet economist
Nikolai Kondratiev (1892–1938) proposed the existence of Kondratiev waves
in Western capitalist economies fifty to sixty years long.
German historical school of economics Wilhelm Roscher (1817–1894):
Main article: Historical school of economics:
In the mid-1840s German economist Wilhelm Roscher (1817–1894) founded the
German historical school of economics, which promoted the cyclical theory of
nations—economies passing through youth, manhood, and senility—and
spread through academia in Britain and the U.S., dominating it for the rest of
the 19th century.[50]
Thorstein Veblen and the American Way :Thorstein Veblen (1857–1929):
Main article: Thorstein Veblen
Thorstein Veblen (1857–1929), who came from rural midwestern America and
worked at the University of Chicago is one of the best-known early critics of
the "American Way". In The Theory of the Leisure Class (1899) he
scorned materialistic culture and wealthy people who conspicuously consumed
their riches as a way of demonstrating success. In The Theory of Business
Enterprise (1904) Veblen distinguished production for people to use things and
production for pure profit, arguing that the former is often hindered because
businesses pursue the latter. Output and technological advance are restricted
by business practices and the creation of monopolies. Businesses protect their
existing capital investments and employ excessive credit, leading to
depressions and increasing military expenditure and war through business
control of political power. These two books, focusing on criticism of
consumerism and profiteering did not advocate change. However, in 1918 he moved
to New York to begin work as an editor of a magazine called The Dial, and then
in 1919, along with Charles A. Beard, James Harvey Robinson, and John Dewey he
helped found the New School for Social Research (known today as The New
School). He was also part of the Technical Alliance,[70] created in 1919 by
Howard Scott. From 1919 through 1926 Veblen continued to write and to be
involved in various activities at The New School. During this period he wrote
The Engineers and the Price System (1921).[50][71]
World wars, revolution and great depression (early to mid 20th century):
At the outbreak of World War I (1914 –1918), Alfred Marshall was still
working on his last revisions of his Principles of Economics. The 20th
century's initial climate of optimism was soon violently dismembered in the
trenches of the Western Front. During the war, production in Britain, Germany,
and France was switched to the military. In 1917 Russia crumbled into
revolution led by Vladimir Lenin and who promoted Marxist theory and
collectivized the means of production. Also in 1917 the United States of
America entered the war Allies (France and Britain), with President Woodrow
Wilson claiming to be "making the world safe for democracy", devising
a peace plan of Fourteen Points. In 1918 Germany launched a spring offensive
which failed, and as the allies counterattacked and more millions were
slaughtered, Germany slid into the German Revolution, its interim government
suing for peace on the basis of Wilson's Fourteen Points. After the war, Europe
lay in ruins, financially, physically, psychologically, and its future was
dependent on the dictates of the Versailles Conference in 1919. After World War
I, Europe and the Soviet Union lay in ruins, and the British Empire was nearing
its end, leaving the United States as the preeminent global economic power.
Before World War II, American economists had played a minor role. During this
time institutional economists had been largely critical of the "American
Way" of life, especially the conspicuous consumption of the Roaring
Twenties before the Wall Street Crash of 1929. The most important development
in economic thought during the Great Depression was the Keynesian revolution,
including the publication in 1936 of The General Theory of Employment,
Interest, and Money by John Maynard Keynes. (See the discussion of Keynesianism
below.) Subsequently, a more orthodox body of thought took root, reacting
against the lucid debating style of Keynes, and remathematizing the profession.
The orthodox center was also challenged by a more radical group of scholars
based at the University of Chicago, who advocated "liberty" and
"freedom", looking back to 19th century-style non-interventionist
governments.
Econometrics:
Main articles: Ragnar Frisch, Jan Tinbergen, Wassily Leontief, Lawrence Klein,
Clive Granger, Trygve Haavelmo, and Econometrics:
Ragnar Frisch (1895–1973) Jan Tinbergen (1903–1994) Clive Granger
(1934–2009) Trygve Haavelmo (1911–1999)
In the 1930s Norwegian economist Ragnar Frisch (1895–1973) and Dutch
economist Jan Tinbergen (1903–1994) pioneered Econometrics, receiving the
first-ever Nobel Prize in Economics in 1969. In 1936 Russian-American economist
Wassily Leontief (1905–1999) proposed the Input-Output Model of economics,
which uses linear algebra and is ideally suited to computers, receiving the
1973 Nobel Economics Prize. After World War II, Lawrence Klein (1920–)
pioneered the use of computers in econometric modeling, receiving the 1980
Nobel Economics Prize. In 1963–1964 as John Tukey of Princeton University
was developing the revolutionary fast Fourier transform, which greatly speed up
the calculation of Fourier Transforms, his British assistant Sir Clive Granger
(1934–2009) pioneered the use of Fourier Transforms in economics,
receiving the 2003 Nobel Economics Prize. Ragnar Frisch's assistant Trygve
Haavelmo (1911–1999) received the 1989 Nobel Economics Prize for
clarifying the probability foundations of econometrics and for analysis of
simultaneous economic structures.
Means and corporate governance:
Main articles: Adolf A. Berle and Gardiner C. Means
Adolf Augustus Berle, Jr. (1895–1971) with Gardiner Means was a
foundational figure of modern corporate governance. The Great Depression was a
time of significant upheaval in the world economy. One of the most original
contributions to understanding what went wrong came from Harvard University
lawyer Adolf Berle (1895–1971), who like John Maynard Keynes had resigned
from his diplomatic job at the Paris Peace Conference, 1919 and was deeply
disillusioned by the Versailles Treaty. In his book with American economist
Gardiner C. Means (1896–1988) The Modern Corporation and Private Property
(1932) he detailed the evolution in the contemporary economy of big business,
and argued that those who controlled big firms should be better held to
account. Directors of companies are held to account to the shareholders of
companies, or not, by the rules found in company law statutes. This might
include rights to elect and fire the management, require for regular general
meetings, accounting standards, and so on. In 1930s America the typical company
laws (e.g. in Delaware) did not clearly mandate such rights. Berle argued that
the unaccountable directors of companies were therefore apt to funnel the
fruits of enterprise profits into their own pockets, as well as manage in their
own interests. The ability to do this was supported by the fact that the
majority of shareholders in big public companies were single individuals, with
scant means of communication, in short, divided and conquered. Berle served in
President Franklin Delano Roosevelt's administration through the Great
Depression as a key member of his Brain Trust, developing many New Deal
policies. In 1967 Berle and Means issued a revised edition of their work, in
which the preface added a new dimension. It was not only the separation of
controllers of companies from the owners as shareholders at stake. They posed
the question of what the corporate structure was really meant to achieve:
"Stockholders toil not, neither do they spin, to earn [dividends and share
price increases]. They are beneficiaries by position only. Justification for
their inheritance... can be founded only upon social grounds... that
justification turns on the distribution as well as the existence of wealth. Its
force exists only in direct ratio to the number of individuals who hold such
wealth. Justification for the stockholder's existence thus depends on
increasing distribution within the American population. Ideally the
stockholder's position will be impregnable only when every American family has
its fragment of that position and of the wealth by which the opportunity to
develop individuality becomes fully actualized."[72]
Industrial organization economics:
Main articles: Edward Chamberlin, Joan Robinson, and Industrial organization:
In 1933 American economist Edward Chamberlin (1899–1967) published The
Theory of Monopolistic Competition. The same year British economist Joan
Robinson (1903–1983) published The Economics of Imperfect Competition.
Together they founded Industrial Organization Economics. Chamberlin also
founded Experimental Economics.
Linear programming Leonid Kantorovich (1912–1986):
Main articles: Leonid Kantorovich and Linear programming :
In 1939 Russian economist Leonid Kantorovich (1912–1986) developed Linear
Programming for the optimal allocation of resources, receiving the 1975 Nobel
Economics Prize.
Ecology and energy:
By the twentieth century, the industrial revolution had led to an exponential
increase in the human consumption of resources. The increase in health, wealth
and population was perceived as a simple path of progress. However, in the
1930s economists began developing models of non-renewable resource management
(see Hotelling's rule) and the sustainability of welfare in an economy that
uses non-renewable resources. Concerns about the environmental and social
impacts of industry had been expressed by some Enlightenment political
economists and in the Romantic movement of the 1800s. Overpopulation had been
discussed in an essay by Thomas Malthus (see Malthusian catastrophe), while
John Stuart Mill foresaw the desirability of a stationary state economy, thus
anticipating concerns of the modern discipline of ecological
economics.[73][74][75][76][77]
Ecological economics :
Ecological economics was founded in the works of Kenneth E. Boulding, Nicholas
Georgescu-Roegen, Herman Daly and others. The disciplinary field of ecological
economics also bears some similarity to the topic of green economics.[78]
According to ecological economist Malte Faber, ecological economics is defined
by its focus on nature, justice, and time. Issues of intergenerational equity,
irreversibility of human impact on the environment, uncertainty of long-term
outcomes, thermodynamics limits to growth, and sustainable development guide
ecological economic analysis and valuation.[79]
Energy accounting :
Energy accounting was proposed in the early 1930s as a scientific alternative
to a price system, or money method of regulating society.[80][81] Joseph
Tainter[82] suggests that a diminishing ratio of energy returned on energy
invested is a chief cause of the collapse of complex societies. Falling EROEI
due to depletion of non-renewable resources also poses a difficult challenge
for industrial economies. Sustainability becomes an issue as survival is
threatened due to climate change.
Institutional economics:
Main articles: Institutional economics, John R. Commons, and Walton H. Hamilton
John R. Commons (1862–1945):
In 1919 Yale economist Walton H. Hamilton coined the term "Institutional
economics". In 1934 John R. Commons (1862–1945), another economist
from midwestern America published Institutional Economics (1934), based on the
concept that the economy is a web of relationships between people with
diverging interests, including monopolies, large corporations, labor disputes,
and fluctuating business cycles. They do however have an interest in resolving
these disputes. Government, thought Commons, ought to be the mediator between
the conflicting groups. Commons himself devoted much of his time to advisory
and mediation work on government boards and industrial commissions.
Arthur Cecil Pigou:
Main article: Arthur Cecil Pigou:
Arthur Cecil Pigou (1877–1959):
In 1920 Alfred Marshall's student Arthur Cecil Pigou (1877–1959) published
Wealth and Welfare, which insisted on the possibility of market failures,
claiming that markets are inefficient in the case of economic externalities,
and the state must interfere to prevent them. However, Pigou retained free
market beliefs, and in 1933, in the face of the economic crisis, he explained
in The Theory of Unemployment that the excessive intervention of the state in
the labor market was the real cause of massive unemployment because the
governments had established a minimal wage, which prevented wages from
adjusting automatically. This was to be the focus of attack from Keynes. In
1943 Pigou published the paper The Classical Stationary State, which
popularized the Pigou (Real Balance) Effect, the stimulation of output and
employment during deflation by increasing consumption due to a rise in wealth.
Market socialism:
Main articles: Market socialism, Fred M. Taylor, Oskar R. Lange, Abba Lerner,
and Abram Bergson Fred M. Taylor (1855–1932) Oskar R. Lange
(1904–1965)
Abba Lerner (1903–1982):
In response to the Economic Calculation Problem proposed by the Austrian School
of Economics that disputes the efficiency of a state-run economy, the theory of
Market Socialism was developed in the late 1920s and 1930s by economists Fred
M. Taylor (1855–1932), Oskar R. Lange (1904–1965), Abba Lerner
(1903–1982) et al., combining Marxian economics with neoclassical
economics after dumping the labor theory of value. In 1938 Abram Bergson
(1914–2003) defined the Social Welfare Function.
The Stockholm school of economics:
Main articles: Stockholm school (economics), Bertil Ohlin, Gunnar Myrdal, Knut
Wicksell, and International trade Eli Heckscher (1879–1952) Bertil Ohlin
(1899–1977) Gunnar Myrdal (1898–1987)
Knut Wicksell (1851–1926):
In the 1930s the Stockholm School of Economics was founded by Eli Heckscher
(1879–1952), Bertil Ohlin (1899–1977), Gunnar Myrdal (1898–1987)
et al. based on the works of John Maynard Keynes and Knut Wicksell
(1851–1926), advising the founders of the Swedish Socialist welfare state.
In 1933 Ohlin and Heckscher proposed the Heckscher-Ohlin Model of International
Trade, which claims that countries will export products that use their abundant
and cheap factors of production and import products that use their scarce
factors of production. In 1977 Ohlin was awarded a share of the Nobel Economics
Prize. In 1957 Myrdal published his theory of Circular Cumulative Causation, in
which a change in one institution ripples through others. In 1974 he received a
share of the Nobel Economics Prize.
French Regulation school:
This school includes economists like Michel Aglietta (1938), André
Orléan (1950), Robert Boyer [fr] (1943), Benjamin Coriat (1948) and
Alain Lipietz (1947). It is one of the two heterodox schools in France, the
other being l'école des conventions. Their interests revolves around
accounting for the regime of regulation of specific historic stage of
capitalsim. They have mainly analysed the fordist mode of regulation, who
corresponds to the after war period. Production as organised scientifically and
products weren't diversified. This corresponds with a homogenous consumption of
goods. The economy was production led, where firms first produce the optimal
amount of a type of good in the cheapest manner possible, destined to be mass
consumed. Their inquiry consists of explaining how a stable mode of regulation
can emerge in a capitalist economy, which inherently contains crises. Whereas
orthodox economists tend to explain the causes of crises and disequilibriums in
a supposedly self-regulating economy.
The American Economic Association:
Main articles: American Economic Association, Richard T. Ely, and Land
economics Richard T. Ely (1854–1943):
In 1885 the American Economic Association (AEA) was founded by Richard T. Ely
(1854–1943) et al., publishing the American Economic Review starting in
1911. In 1918 Ely published Private Colonization of Land, founding Lambda Alpha
International in 1930 to promote Land Economics.[50]
Keynesianism (20th century):
Main articles: John Maynard Keynes and The Economic Consequences of the Peace .
John Maynard Keynes (1883–1946) was born in Cambridge, educated at Eton,
and supervised by both A. C. Pigou and Alfred Marshall at Cambridge University.
He began his career as a lecturer before working for the British government
during the Great War, rising to be the British government's financial
representative at the Versailles Conference, where he profoundly disagreed with
the decisions made. His observations were laid out in his book The Economic
Consequences of the Peace[83] (1919), where he documented his outrage at the
collapse of American adherence to the Fourteen Points[84] and the mood of
vindictiveness that prevailed towards Germany.,[85] and he resigned from the
conference, using extensive economic data provided by the conference records to
argue that if the victors forced war reparations to be paid by the defeated
Central Powers, then a world financial crisis would ensue, leading to a second
world war.[86] Keynes finished his treatise by advocating, first, a reduction
in reparation payments by Germany to a realistically manageable level,
increased intra-governmental management of continental coal production and a
free trade union through the League of Nations;[87] second, an arrangement to
set off debt repayments between the Allied countries;[88] third, complete
reform of international currency exchange and an international loan fund;[89]
and fourth, a reconciliation of trade relations with Russia and Eastern
Europe.[90] The book was an enormous success, and though it was criticized for
false predictions by a number of people,[91] without the changes he advocated,
Keynes's dark forecasts matched the world's experience through the Great
Depression which began in 1929, and the descent into World War II in 1939.
World War I had been touted as the "war to end all wars", and the
absolute failure of the peace settlement generated an even greater
determination to not repeat the same mistakes. With the defeat of Fascism, the
Bretton Woods Conference was held in July 1944 to establish a new economic
order, in which Keynes was again to play a leading role.[92]
The General Theory:
Main article: The General Theory of Employment, Interest and Money:
During the Great Depression, Keynes published his most important work, The
General Theory of Employment, Interest and Money (1936). The Great Depression
had been sparked by the Wall Street Crash of 1929, leading to massive rises in
unemployment in the United States, leading to debts being recalled from
European borrowers, and an economic domino effect across the world. Orthodox
economics called for a tightening of spending, until business confidence and
profit levels could be restored. Keynes by contrast, had argued in A Tract on
Monetary Reform (1923) (which argues for a stable currency) that a variety of
factors determined economic activity, and that it was not enough to wait for
the long run market equilibrium to restore itself. As Keynes famously remarked:
"...this long run is a misleading guide to current affairs. In the long
run we are all dead. Economists set themselves too easy, too useless a task if
in tempestuous seasons they can only tell us that when the storm is long past
the ocean is flat again."[93] On top of the supply of money, Keynes
identified the propensity to consume, inducement to invest, marginal efficiency
of capital, liquidity preference, and multiplier effect as variables which
determine the level of the economy's output, employment, and price levels. Much
of this esoteric terminology was invented by Keynes especially for his General
Theory. Keynes argued that if savings were being withheld from investment in
financial markets, total spending falls, leading to reduced incomes and
unemployment, which reduces savings again. This continues until the desire to
save becomes equal to the desire to invest, which means a new
"equilibrium" is reached and the spending decline halts. This new
"equilibrium" is a depression, where people are investing less, have
less to save and less to spend. Keynes argued that employment depends on total
spending, which is composed of consumer spending and business investment in the
private sector. Consumers only spend "passively", or according to
their income fluctuations. Businesses, on the other hand, are induced to invest
by the expected rate of return on new investments (the benefit) and the rate of
interest paid (the cost). So, said Keynes, if business expectations remained
the same, and government reduces interest rates (the costs of borrowing),
investment would increase, and would have a multiplied effect on total
spending. Interest rates, in turn, depend on the quantity of money and the
desire to hold money in bank accounts (as opposed to investing). If not enough
money is available to match how much people want to hold, interest rates rise
until enough people are put off. So if the quantity of money were increased,
while the desire to hold money remained stable, interest rates would fall,
leading to increased investment, output and employment. For both these reasons,
Keynes therefore advocated low interest rates and easy credit, to combat
unemployment. But Keynes believed in the 1930s, conditions necessitated public
sector action. Deficit spending, said Keynes, would kick-start economic
activity. This he had advocated in an open letter to U.S. President Franklin D.
Roosevelt in the New York Times (1933). The New Deal programme in the U.S. had
been well underway by the publication of the General Theory. It provided
conceptual reinforcement for policies already pursued. Keynes also believed in
a more egalitarian distribution of income, and taxation on unearned income
arguing that high rates of savings (to which richer folk are prone) are not
desirable in a developed economy. Keynes therefore advocated both monetary
management and an active fiscal policy.
The Cambridge Circus :
Main articles: Keynesian economics; Cambridge Circus (economics); Joan
Robinson; Alfred Eichner; Richard Kahn, Baron Kahn; Piero Sraffa; and John
Hicks
During World War II Keynes acted as adviser to HM Treasury again, negotiating
major loans from the U.S., helping formulate the plans for the International
Monetary Fund, the World Bank, and the International Trade Organisation[94] at
the 1944 Bretton Woods Conference, a package designed to stabilize world
economy fluctuations that had occurred in the 1920s and create a level trading
field across the globe. Keynes died little more than a year later, but his
ideas had already shaped a new global economic order, and all Western
governments followed the Keynesian economics program of deficit spending to
avert crises and maintain full employment.
Joan Robinson (1903–1983):
One of Keynes's pupils at Cambridge was Joan Robinson (1903–1983), a
member of Keynes's Cambridge Circus, who contributed to the notion that
competition is seldom perfect in a market, an indictment of the theory of
markets setting prices. In The Production Function and the Theory of Capital
(1953) Robinson tackled what she saw to be some of the circularity in orthodox
economics. Neoclassicists assert that a competitive market forces producers to
minimize the costs of production. Robinson said that costs of production are
merely the prices of inputs, like capital. Capital goods get their value from
the final products. And if the price of the final products determines the price
of capital, then it is, argued Robinson, utterly circular to say that the price
of capital determines the price of the final products. Goods cannot be priced
until the costs of inputs are determined. This would not matter if everything
in the economy happened instantaneously, but in the real world, price setting
takes time – goods are priced before they are sold. Since capital cannot
be adequately valued in independently measurable units, how can one show that
capital earns a return equal to the contribution to production?
Alfred Eichner (1937–1988) was an American post-Keynesian economist who
challenged the neoclassical price mechanism and asserted that prices are not
set through supply and demand but rather through mark-up pricing. Eichner is
one of the founders of the post-Keynesian school of economics and was a
professor at Rutgers University at the time of his death. Eichner's writings
and advocacy of thought, differed with the theories of John Maynard Keynes, who
was an advocate of government intervention in the free market and proponent of
public spending to increase employment. Eichner argued that investment was the
key to economic expansion. He was considered an advocate of the concept that
government incomes policy should prevent inflationary wage and price
settlements in connection to the customary fiscal and monetary means of
regulating the economy.
Richard Kahn (1905–1989) was a member of the Cambridge Circus who in 1931
proposed the Multiplier.
Piero Sraffa (1898–1983) :
Piero Sraffa (1898–1983) came to England from Fascist Italy in the 1920s,
and became a member of the Cambridge Circus. In 1960 he published a small book
called Production of Commodities by Means of Commodities, which explained how
technological relationships are the basis for production of goods and services.
Prices result from wage-profit tradeoffs, collective bargaining, labour and
management conflict and the intervention of government planning. Like Robinson,
Sraffa was showing how the major force for price setting in the economy was not
necessarily market adjustments.
John Hicks (1904–1989) of England was a Keynesian who in 1937 proposed the
Investment Saving – Liquidity Preference Money Supply Model, which treats
the intersection of the IS and LM curves as the general equilibrium in both
markets.
New Keynesian macroeconomics:
Main articles: New Keynesian, Edmund Phelps, John B. Taylor, Sticky
(economics), George Akerlof, Janet Yellen, Huw Dixon, Michael Woodford
(economist), and Julio Rotemberg
Edmund Phelps, John Taylor, Janet Yellen and Huw Dixon.
In 1977 Edmund Phelps (1933–) (who was awarded the 2006 Nobel Economics
Prize) and John B. Taylor (1946–) published a paper proving that staggered
setting of wages and prices gives monetary policy a role in stabilizing
economic fluctuations if the wages/prices are sticky, even when all workers and
firms have rational expectations, which caused Keynesian economics to make a
comeback among mainstream economists with New Keynesian Macroeconomics. Its
central theme is the provision of a microeconomic foundation for Keynesian
macroeconomics, obtained by identifying minimal deviations from the standard
microeconomic assumptions which yield Keynesian macroeconomic conclusions, such
as the possibility of significant welfare benefits from macroeconomic
stabilization.[95] In 1985 George Akerlof (1940–) and Janet Yellen
(1946–) published menu costs arguments showing that, under imperfect
competition, small deviations from rationality generate significant (in welfare
terms) price stickiness.[96] In 1987 British economist Huw Dixon (1958–)
published A simple model of imperfect competition with Walrasian features,[97]
the first work to demonstrate in a simple general equilibrium model that the
fiscal multiplier could be increasing with the degree of imperfect competition
in the output market, helping develop New Keynesian economics. The reason for
this is that imperfect competition in the output market tends to reduce the
real wage, leading to the household substituting away from consumption towards
leisure. When government spending is increased, the corresponding increase in
lump-sum taxation causes both leisure and consumption to decrease (assuming
that they are both a normal good). The greater the degree of imperfect
competition in the output market, the lower the real wage and hence the more
the reduction falls on leisure (i.e. households work more) and less on
consumption. Hence the fiscal multiplier is less than one, but increasing in
the degree of imperfect competition in the output market.[98] In 1997 American
economist Michael Woodford (1955–) and Argentine economist Julio Rotemberg
(1953–) published the first paper describing a microfounded DSGE
New Keynesian macroeconomic model.
Sidney Weintraub, Paul Davidson and Post-Keynesian economics
In 1975 American economists Sidney Weintraub (1914–1983) and Henry Wallich
(1914–1988) published A Tax-Based Incomes Policy, promoting Tax-Based
Incomes Policy (TIP), using the income tax mechanism to implement an
anti-inflationary incomes policy. In 1978 Weintraub and American economist Paul
Davidson (1930–) founded the Journal of Post Keynesian Economics. This
opened the door to many younger economists such as E. Ray Canterbery
(1935–). Always Post Keynesian in his style and approach, Canterbery went
on to make contributions outside traditional Post Keynesianism. His friend,
John Kenneth Galbraith, was a long-time influence.
The credit theory of money:
Main articles: Alfred Mitchell-Innes and Credit theory of money
In 1913 English economist-diplomat Alfred Mitchell-Innes (1864–1950)
published What is Money?, which was reviewed favorably by John Maynard Keynes,
followed in 1914 by The Credit Theory of Money, advocating the Credit Theory of
Money, which economist L. Randall Wray called "The best pair of articles
on the nature of money written in the twentieth century."[99]
The Chicago school of economics (20th century) Milton Friedman (1912–2006)
Jacob Mincer (1922–2006) Gary Becker (1930–2014) Richard Posner
(1939–)
Main articles: Chicago school of economics, Law and economics, and Monetarism
Key people: Ronald Coase; Richard Posner; Frank Knight; Jacob Viner; Henry
Calvert Simons; Milton Friedman; Jacob Mincer; George Stigler; Robert Lucas,
Jr.; and Gary Becker
The government-interventionist monetary and fiscal policies that the postwar
Keynesian economists recommended came under attack by a group of theorists
working at the University of Chicago, which came in the 1950s to be known as
the Chicago School of Economics. Before World War II, the Old Chicago School of
strong Keynesians was founded by Frank Knight (1885–1972), Jacob Viner
(1892–1970), and Henry Calvert Simons (1899–1946). The second
generation was known for a more conservative line of thought, reasserting a
libertarian view of market activity that people are best left to themselves to
be free to choose how to conduct their own affairs.[50] Ronald Coase
(1910–2013) of the Chicago School of Economics was the most prominent
economic analyst of law, and the 1991 Nobel Prize in Economics winner. His
first major article The Nature of the Firm (1937) argued that the reason for
the existence of firms (companies, partnerships, etc.) is the existence of
transaction costs. Homo economicus trades through bilateral contracts on open
markets until the costs of transactions make the use of corporations to produce
things more cost-effective. His second major article The Problem of Social Cost
(1960) argued that if we lived in a world without transaction costs, people
would bargain with one another to create the same allocation of resources,
regardless of the way a court might rule in property disputes. Coase used the
example of an old legal case about nuisance named Sturges v Bridgman, where a
noisy sweets maker and a quiet doctor were neighbors and went to court to see
who should have to move.[100] Coase said that regardless of whether the judge
ruled that the sweets maker had to stop using his machinery, or that the doctor
had to put up with it, they could strike a mutually beneficial bargain about
who moves house that reaches the same outcome of resource distribution. Only
the existence of transaction costs may prevent this.[101] So the law ought to
preempt what would happen, and be guided by the most efficient solution. The
idea is that law and regulation are not as important or effective at helping
people as lawyers and government planners believe.[102] Coase and others like
him wanted a change of approach, to put the burden of proof for positive
effects on a government that was intervening in the market, by analyzing the
costs of action.[103] In the 1960s Gary Becker (1930–2014) and Jacob
Mincer (1922–2006) of the Chicago School of Economics founded New Home
Economics, which spawned Family Economics. In 1973 Coase disciple Richard
Posner (1939–) published Economic Analysis of Law, which became a standard
textbook, causing him to become the most cited legal scholar of the 20th
century. In 1981 he published The Economics of Justice, which claimed that
judges have been interpreting common law as it they were trying to maximize
economic welfare. Milton Friedman (1912–2006) of the Chicago School of
Economics is one of the most influential economists of the late 20th, century,
receiving the Nobel Prize in Economics in 1976. He is known for A Monetary
History of the United States (1963), in which he argued that the Great
Depression was caused by the policies of the Federal Reserve. Friedman argues
that laissez-faire government policy is more desirable than government
intervention in the economy. Governments should aim for a neutral monetary
policy oriented toward long-run economic growth, by gradual expansion of the
money supply. He advocates the quantity theory of money, that general prices
are determined by money. Therefore, active monetary (e.g. easy credit) or
fiscal (e.g. tax and spend) policy can have unintended negative effects. In
Capitalism and Freedom (1962), Friedman wrote: "There is likely to be a
lag between the need for action and government recognition of the need; a
further lag between recognition of the need for action and the taking of
action; and a still further lag between the action and its effects."[104]
Friedman was also known for his work on the consumption function, the Permanent
Income Hypothesis (1957), which Friedman referred to as his best scientific
work.[105] This work contended that rational consumers would spend a
proportional amount of what they perceived to be their permanent income.
Windfall gains would mostly be saved. Tax reductions likewise, as rational
consumers would predict that taxes would have to rise later to balance public
finances. Other important contributions include his critique of the Phillips
Curve, and the concept of the natural rate of unemployment (1968).[50]
New classical macroeconomics and synthesis Prescott (1940–), Sargent
(1943–), Kydland (1948–):
Main articles: New Classical Economics; Robert Lucas, Jr.; Finn Kydland; Edward
C. Prescott; Thomas J. Sargent; Neil Wallace; New Classical economics; Real
business cycle theory; Dynamic stochastic general equilibrium; and New
neoclassical synthesis
In the early 1970s American Chicago School economist Robert E. Lucas, Jr.
(1937–) founded New Classical Macroeconomics based on Milton Friedman's
monetarist critique of Keynesian macroeconomics, and the idea of rational
expectations,[106] first proposed in 1961 by John F. Muth, opposing the idea
that government intervention can or should stabilize the economy.[107] The
Policy-Ineffectiveness Proposition (1975)[108] of Thomas J. Sargent
(1943–) and Neil Wallace (1939–), which seemed to refute a basic
assumption of Keynesian economics was also adopted. The Lucas aggregate supply
function states that economic output is a function of money or price
"surprise." Lucas was awarded the 1995 Nobel Economics Prize. Lucas'
model was superseded as the standard model of New Classical Macroeconomics by
the Real Business Cycle Theory, proposed in 1982 by Finn Kydland (1943–)
and Edward C. Prescott (1940–), which seeks to explain observed
fluctuations in output and employment in terms of real variables such as
changes in technology and tastes. Assuming competitive markets, real business
cycle theory implies that cyclical fluctuations are optimal responses to
variability in technology and tastes, and that macroeconomic stabilization
policies must reduce welfare.[109] In 1982 Kydland and Prescott also founded
the theory of Dynamic Stochastic General Equilibrium (DSGE), large systems of
microeconomic equations combined into models of the general economy, which
became central to the New Neoclassical Synthesis, incorporating theoretical
elements such as sticky prices from New Keynesian Macroeconomics. They shared
the 2004 Nobel Economics Prize.[50]
Efficient market hypothesis:
Main articles: Eugene Fama, Holbrook Working, and Efficient market hypothesis
Eugene Fama (1939–):
In 1965 Chicago School economist Eugene Fama (1939–) published The
Behavior of Stock Market Prices, which found that stock market prices follow a
random walk, proposing the Efficient Market Hypothesis, that randomness is
characteristic of a perfectly functioning financial market. The same year Paul
Samuelson published a paper concluding the same thing with a mathematical
proof, sharing the credit. Earlier in 1948 Holbrook Working (1895–1985)
published a paper saying the same thing, but not in a mathematical form. In
1970 Fama published Efficient Capital Markets: A Review of Theory and Empirical
Work, proposing that efficient markets can be strong, semi-strong, or weak, and
also proposing the Joint Hypothesis Problem, that the idea of market efficiency
can't be rejected without also rejecting the market mechanism.
Games, evolution and growth (20th century) John von Neumann (1903–1957)
John Forbes Nash Jr. (1928–2015) Joseph Alois Schumpeter (1883–1950)
Robert Solow (1924–)
See also: Game theory, Evolutionary economics, and Neoclassical growth model
Key people: John von Neumann, Oskar Morgenstern, Robert Solow, and Trevor Swan
In 1898 Thorstein Veblen published Why is Economics not an Evolutionary
Science, which coins the term Evolutionary economics, making use of
anthropology to deny that there is a universal human nature, emphasizing the
conflict between "industrial" or instrumental and
"pecuniary" or ceremonial values, which became known as the
Ceremonial/Instrumental Dichotomy.[50]
Joseph Alois Schumpeter (1883–1950) was an Austrian School economist and
political scientist best known for his works on business cycles and innovation.
He insisted on the role of the entrepreneurs in an economy. In Business Cycles:
A theoretical, historical and statistical analysis of the Capitalist process
(1939), Schumpeter synthesized the theories about business cycles, suggesting
that they could explain the economic situations. According to Schumpeter,
capitalism necessarily goes through long-term cycles because it is entirely
based upon scientific inventions and innovations. A phase of expansion is made
possible by innovations, because they bring productivity gains and encourage
entrepreneurs to invest. However, when investors have no more opportunities to
invest, the economy goes into recession, several firms collapse, closures and
bankruptcy occur. This phase lasts until new innovations bring a creative
destruction process, i.e. they destroy old products, reduce the employment, but
they allow the economy to start a new phase of growth, based upon new products
and new factors of production.[50][110] In 1944 Hungarian-American
mathematician John von Neumann and Oskar Morgenstern published Theory of Games
and Economic Behavior, founding Game Theory, which was widely adopted by
economists. In 1951 Princeton mathematician John Forbes Nash Jr. published the
article Non-Cooperative Games, becoming the first to define a Nash Equilibrium
for non-zero-sum games. In 1956 American economist Robert Solow (1924–)
and Australian economist Trevor Swan (1918–1989) proposed the
Solow–Swan model, based on productivity, capital accumulation, population
growth, and technological progress. In 1956 Swan also proposed the Swan diagram
of the internal-external balance. In 1987 Solow was awarded the Nobel Economics
Prize.[111]:440–41
Post World War II and globalization (mid to late 20th century):
John K. Galbraith (1908–2006) worked under the New Deal administration of
Franklin Delano Roosevelt
Paul Samuelson (1915–2009) wrote the best selling economics texts.
Kenneth Arrow (1921–2017) Gérard Debreu (1921–2004)
Main articles: Globalization, Neoclassical synthesis, and Positive economics
Key people: John Kenneth Galbraith, Paul Samuelson, Kenneth Arrow, and
Gérard Debreu
The globalization era began with the end of World War II and the rise of the
U.S. as the world's leading economic power, along with the United Nations. To
prevent another global depression, the victorious allies countries forgave
Germany its war debts and used its surpluses to rebuild Europe and encourage
reindustrialization of Germany and Japan. In the 1960s it changed its role to
recycling global surpluses.[112] After World War II, Canadian-born John Kenneth
Galbraith (1908–2006) became one of the standard bearers for pro-active
government and liberal-democrat politics. In The Affluent Society (1958),
Galbraith argued that voters reaching a certain material wealth begin to vote
against the common good. He also argued that the "conventional
wisdom" of the conservative consensus was not enough to solve the problems
of social inequality.[113] In an age of big business, he argued, it is
unrealistic to think of markets of the classical kind. They set prices and use
advertising to create artificial demand for their own products, distorting
people's real preferences. Consumer preferences actually come to reflect those
of corporations – a "dependence effect" – and the economy
as a whole is geared to irrational goals.[114] In The New Industrial State
Galbraith argued that economic decisions are planned by a private-bureaucracy,
a technostructure of experts who manipulate marketing and public relations
channels. This hierarchy is self-serving, profits are no longer the prime
motivator, and even managers are not in control. Because they are the new
planners, corporations detest risk, require steady economic and stable markets.
They recruit governments to serve their interests with fiscal and monetary
policy, for instance adhering to monetarist policies which enrich money-lenders
in the City through increases in interest rates. While the goals of an affluent
society and complicit government serve the irrational technostructure, public
space is simultaneously impoverished. Galbraith paints the picture of stepping
from penthouse villas onto unpaved streets, from landscaped gardens to unkempt
public parks. In Economics and the Public Purpose (1973) Galbraith advocates a
"new socialism" as the solution, nationalising military production
and public services such as health care, introducing disciplined salary and
price controls to reduce inequality.[115] In contrast to Galbraith's linguistic
style, the post-war economics profession began to synthesize much of Keynes'
work with mathematical representations. Introductory university economics
courses began to present economic theory as a unified whole in what is referred
to as the neoclassical synthesis. "Positive economics" became the
term created to describe certain trends and "laws" of economics that
could be objectively observed and described in a value-free way, separate from
"normative economic" evaluations and judgments. The Paul Samuelson's
(1915–2009) Foundations of Economic Analysis published in 1947 was an
attempt to show that mathematical methods could represent a core of testable
economic theory. Samuelson started with two assumptions. First, people and
firms will act to maximize their self-interested goals. Second, markets tend
towards an equilibrium of prices, where demand matches supply. He extended the
mathematics to describe equilibrating behavior of economic systems, including
that of the then new macroeconomic theory of John Maynard Keynes.
Whilst Richard Cantillon had imitated Isaac Newton's mechanical physics of
inertia and gravity in competition and the market,[28] the physiocrats had
copied the body's blood system into circular flow of income models, William
Jevons had found growth cycles to match the periodicity of sunspots, Samuelson
adapted thermodynamics formulae to economic theory. Reasserting economics as a
hard science was being done in the United Kingdom also, and one celebrated
"discovery", of A. W. Phillips, was of a correlative relationship
between inflation and unemployment. The workable policy conclusion was that
securing full employment could be traded-off against higher inflation.
Samuelson incorporated the idea of the Phillips curve into his work. His
introductory textbook Economics was influential and widely adopted. It became
the most successful economics text ever. Paul Samuelson was awarded the new
Nobel Prize in Economics in 1970 for his merging of mathematics and political
economy.
American economist Kenneth Arrow's (1921–2017) published Social Choice and
Individual Values in 1951. It consider connections between economics and
political theory. It gave rise to social choice theory with the introduction of
his "Possibility Theorem". This sparked widespread discussion over
how to interpret the different conditions of the theorem and what implications
it had for democracy and voting. Most controversial of his four (1963) or five
(1950/1951) conditions is the independence of irrelevant alternatives.[116] In
the 1950s Kenneth Arrow and Gérard Debreu (1921–2004) developed the
Arrow–Debreu model of general equilibria. In 1963 Arrow published a paper
which founded Health Economics. In 1971 Arrow and Frank Hahn published General
Competitive Analysis (1971), which reasserted a theory of general equilibrium
of prices through the economy. In 1971, US President Richard Nixon's had
declared that "We are all Keynesians now", announcing wage and price
controls. He lifted this from a comment by Milton Friedman in 1965 which formed
a Time.[117]
International economics Paul Krugman (1953–) James E. Meade
(1907–1995)
Main articles: James E. Meade, Paul Krugman, International economics, and
International trade
In 1951 English economist James E. Meade (1907–1995) published The Balance
of Payments, volume 1 of "The Theory of International Economic
Policy", which proposed the theory of domestic divergence (internal and
external balance), and promoted policy tools for governments. In 1955 he
published volume 2 Trade and Welfare, which proposed the theory of the
"second-best", and promoted protectionism. He shared the 1977 Nobel
Economic Prize with Bertil Ohlin. In 1979 American economist Paul Krugman
(1953–) published a paper founding New trade theory, which attempts to
explain the role of increasing returns to scale and network effects in
international trade. In 1991 he published a paper founding New economic
geography. His textbook International Economics (2007) appears on many
undergraduate reading lists. He was awarded the Nobel Prize in Economics in
2008.
Development economics: Amartya Sen (1933–):
Main articles: Sir Arthur Lewis, Simon Kuznets, Amartya Sen, and Development
economics
In 1954 Saint Lucian economist Sir Arthur Lewis (1915–1991) proposed the
Dual Sector Model of Development Economics, which claims that capitalism
expands by making use of an unlimited supply of labor from the backward
non-capitalist "subsistence sector" until it reaches the Lewisian
breaking point where wages begin to rise, receiving the 1979 Nobel Economics
Prize. In 1955 Russian-born American economist Simon Kuznets (1901–1985),
who introduced the concept of Gross domestic product (GDP) in 1934 published an
article revealing an inverted U-shaped relation between income inequality and
economic growth, meaning that economic growth increases income disparity
between rich and poor in poor countries, but decreases it in wealthy countries.
In 1971 he received the Nobel Economics Prize. Indian economist Amartya Sen
(1933–) expressed considerable skepticism about the validity of
neoclassical assumptions, and was highly critical of rational expectations
theory, devoting his work to Development Economics and human rights. In 1981,
Sen published Poverty and Famines: An Essay on Entitlement and Deprivation
(1981), a book in which he argued that famine occurs not only from a lack of
food, but from inequalities built into mechanisms for distributing food. Sen
also argued that the Bengal famine was caused by an urban economic boom that
raised food prices, thereby causing millions of rural workers to starve to
death when their wages did not keep up.[118] In addition to his important work
on the causes of famines, Sen's work in the field of development economics has
had considerable influence in the formulation of the "Human Development
Report",[119] published by the United Nations Development Programme.[120]
This annual publication that ranks countries on a variety of economic and
social indicators owes much to the contributions by Sen among other social
choice theorists in the area of economic measurement of poverty and inequality.
Sen was awarded the Nobel Prize in Economics in 1998.
New Economic History (Cliometrics):
Main article: New economic history :
In 1958 American economists Alfred H. Conrad (1924–1970) and John R. Meyer
(1927–2009) founded New Economic History, which in 1960 was called
Cliometrics by American economist Stanley Reiter (1925–2014) after Clio,
the muse of history. It uses neoclassical economic theory to reinterpret
historical data, spreading throughout academia, causing economic historians
untrained in economics to disappear from history departments. American
cliometric economists Douglass Cecil North (1920–2015) and Robert William
Fogel (1926–2013) were awarded the 1993 Nobel Economics Prize.
Public choice theory and constitutional economics: James Buchanan
(1919–2013), Gordon Tullock (1922–2014):
Main articles: James M. Buchanan, Gordon Tullock, Public choice theory, and
Constitutional economics:
In 1962 American economists James M. Buchanan (1919–2013) and Gordon
Tullock (1922–2014) published The Calculus of Consent, which revived
Public Choice Theory by differentiating politics (the rules of the game) from
public policy (the strategies to adopt within the rules), founding
Constitutional Economics, the economic analysis of constitutional law. Buchanan
was awarded the 1986 Nobel Economics Prize.
Impossible Trinity Robert Mundell (1932–2021):
Main articles: Marcus Fleming and Robert Mundell:
In 1962–1963 Scottish economist Marcus Fleming (1911–1976) and
Canadian economist Robert Mundell (1932–) published the Mundell-Fleming
Model of the Economy, an extension of the IS-LM Model to an open economy,
proposing the Impossible Trinity of fixed exchange rate, free capital movement,
and an independent monetary policy, only two of which can be maintained
simultaneously. Mundell received the 1999 Nobel Economics Prize.
Market for corporate control:
Main article: Henry Manne:
In 1965 American economist Henry G. Manne (1928–2015) published Mergers
and the Market for Corporate Control in Journal of Political Economy, which
claims that changes in the price of a share of stock in the stock market will
occur more rapidly when insider trading is prohibited than when it is
permitted, founding the theory of market for corporate control.
Information economics George Akerlof (1940–), Joseph Stiglitz
(1943–):
Main articles: Joseph Stiglitz, George Akerlof, and Information economics:
In 1970 George Akerlof (1940–) published the paper The Market for Lemons,
founding the theory of Information Economics, receiving the 2001 Nobel
Economics Prize. Joseph E. Stiglitz (1943–) also received the Nobel
Economics Prize in 2001 for his work in Information Economics. He has served as
chairman of President Clinton's Council of Economic Advisers, and as chief
economist for the World Bank. Stiglitz has taught at many universities,
including Columbia, Stanford, Oxford, Manchester, Yale, and MIT. In recent
years he has become an outspoken critic of global economic institutions. In
Making Globalization Work (2007) he offers an account of his perspectives on
issues of international economics: "The fundamental problem with the
neoclassical model and the corresponding model under market socialism is that
they fail to take into account a variety of problems that arise from the
absence of perfect information and the costs of acquiring information, as well
as the absence or imperfections in certain key risk and capital markets. The
absence or imperfection can, in turn, to a large extent be explained by
problems of information."[121] Stiglitz talks about his book Making
Globalization Work here.[122]
Market design theory:
Main articles: Leonid Hurwicz, Eric Maskin, Roger Myerson, and Market design:
Leonid Hurwicz (1917–2008) Eric Maskin (1950–), Roger Myerson
(1951–):
In 1973 Russian-American mathematician-economist Leonid Hurwicz
(1917–2008) founded Market (Mechanism) Design Theory, a.k.a. Reverse Game
Theory, which allows people to distinguish situations in which markets work
well from those in which they do not, aiding the identification of efficient
trading mechanisms, regulation schemes, and voting procedures; he developed the
theory with Eric Maskin (1950–) and Roger Myerson (1951–), sharing
the 2007 Nobel Economics Prize with them.
The Laffer curve and Reaganomics:
Main articles: Arthur Laffer and Laffer curve:
In 1974 American economist Arthur Laffer formulated the Laffer Curve, which
postulates that no tax revenue will be raised at the extreme tax rates of 0%
and 100%, and that there must be at least one rate where tax revenue would be a
non-zero maximum. This concept was adopted by U.S. President Ronald Reagan in
the early 1980s, becoming the cornerstone of Reaganomics, which was co-founded
by American economist Paul Craig Roberts.
Market regulation:
In 1986 French economist Jean Tirole (1953–) published "Dynamic
Models of Oligopoly", followed by "The Theory of Industrial
Organization" (1988), launching his quest to understand market power and
regulation, resulting in the 2014 Nobel Economics Prize.
Post 2008 financial crisis (21st century) Key people: Alberto Alesina, Carmen
Reinhart, and Kenneth Rogoff
Carmen Reinhart (1955–) and Kenneth Rogoff (1953–) Olivier Blanchard
(1948–)
In 2008, there was a financial crisis which led to a global recession. This
prompted some economists to question the current orthodoxy. One response was
the Keynesian Resurgence. This emerged as a consensus among some policy makers
and economists for Keynesian solutions. Figures in this school included
Dominique Strauss-Kahn, Olivier Blanchard, Gordon Brown, Paul Krugman, and
Martin Wolf.[123][124][125] Austerity was another response, the policy of
reducing government budget deficits. Austerity policies may include spending
cuts, tax increases, or a mixture of both.[126][127] Two influential academic
papers support this position. The first was Large Changes in Fiscal Policy:
Taxes Versus Spending, published in October 2009 by Alberto Alesina and Silvia
Ardagna. It asserted that fiscal austerity measures did not hurt economies, and
actually helped their recovery.[128] The second Growth in a Time of Debt,
published in 2010 by Carmen Reinhart and Kenneth Rogoff. It analyzed public
debt and GDP growth among 20 advanced economies and claimed that high debt
countries grew at -0.1% since WWII. In April 2013 the IMF and the Roosevelt
Institute exposed basic calculation flaws in the Reinhart-Rogoff paper,
claiming that when the flaws were corrected, the growth of the "high
debt" countries was +2.2%, much higher than the original paper predicted.
Following this, on June 6, 2013 Paul Krugman published How the Case for
Austerity Has Crumbled in The New York Review of Books, arguing that the case
for austerity was fundamentally flawed, and calling for an end to austerity
measures.[129]
|
|
